Venture capital can either take your company to the next level--or tear it apart. Here's how to decide whether VC funding is right for your business.

In the movie Wedding Crashers, Owen Wilson and Vince Vaughn’s characters tried to pass themselves off as venture capitalists, claiming their latest project, Holy Shirts and Pants, gives wool to the homeless so they can knit and sell clothing. If only venture capitalists were so benevolent in real life! That venture capitalism is “the backbone of the system--the new pioneer,” as one of the characters puts it, is also debatable. Nevertheless, whether or not to accept VC funding is one of the biggest decisions many entrepreneurs make in the early life of their start-ups.

Unfortunately, it's not an easy decision. Plenty of start-ups have prospered with venture capital investments and plenty have failed. The same can be said of those who did not take VC money. The decision is inherently case-specific and ultimately depends largely on your personal appetite for risk and what other funding options are available.

When I started Evolution Finance (parent company of CardHub.com and WalletHub.com) in 2008, I weighed the pros and cons of taking VC money. Here's my take:

The Pros:

1. The resources to compete. Certain types of businesses--such as those in the renewable energy, biotech, and telecom industries--may require significant amounts of capital just to compete. Without it, they’re basically doomed from the start.

2. The ability to scale quickly. Other businesses can get by without VC funding in the beginning, but eventually need more serious capital to take things to the next level. “We ended up raising money because it is incredibly difficult to scale aggressively without the necessary resources," says Eric Malawer, CEO of the data analytics company DeepMile Networks. "It also proves difficult to think long-term and strategically about the business when you have short-term financial pressures." Plus, says Malawer, VC funding helped him win the marketing war. "We saw competitors with clearly inferior products beating us, because we just couldn’t match their speed to market and marketing efforts,” he says. So if you want to quickly become a national or international player in a given industry, VC money might be the way to go.

3. Connections and expertise. The right venture capital firms not only give you access to their checkbooks, they make their rolodexes and industry experience available as well. In this respect, you can think of the choice to accept VC money as being almost tantamount to NBA star Kevin Durant leaving his agent for Jay-Z’s Roc Nation Sports. His agents at Landmark Sports could have easily handled his contract needs, but Durant was drawn to the rap mogul’s new firm for its marketing reach. For entrepreneurs, “it is all about ‘smart’ versus ‘dumb’ money,” says Dr. Pat Dickson, director of Business and Enterprise Management at Wake Forest University. “The key is accepting money from VC firms that can bring strategic partnerships, unique expertise and key management skills.”

The Cons:

1. Loss of equity (and control). Taking a venture capital investment means sacrificing equity and ceding a certain amount of day-to-day managerial discretion. Venture capitalists bring their own blueprints for success (preconceived notions about how you should be doing things). And unless you’ve negotiated autonomy into your agreement, it’s hard to say no to their ideas since they’re the ones paying the bills. What’s more, if your business model is as good as you think it is, you may be unnecessarily forfeiting a significant share of future profits by taking funding now. As Terry Blum, director of the Institute for Leadership & Entrepreneurship at Georgia Tech, puts it, “If you want a small piece of a big pie, go VC.”

2. Misaligned goals and priorities. Venture capital firms don’t necessarily want what’s best for you or your business in the long run. They want what’s best for their bottom line on their own timetable. These divergent opinions may not only lead to declines in efficiency, but also could create an unnecessarily hostile working environment.

3. A lack of spending discipline. Having a small budget forces you to learn how make a little money go the long way. A start-up team with too much capital may fail to develop the bootstrapping skills necessary to achieve long-term growth. “An abundance of capital tends to dull the mind,” says Angelo Santinelli, an adjunct professor of entrepreneurship at Babson College and founder of the strategy consultancy Dakin Management. “There is the tendency to hire too fast, pursue too many unvalidated ideas, and spend on non-strategic elements of the business.”

4. Managerial distraction. Focus is critical to start-up success, especially when you’re trying to establish a company’s culture and direction. When too much of your attention is monopolized by outside sources--such as a hands-on VC whose ideas don’t necessarily mesh with your own--your company’s day-to-day operations might suffer, leading to mistakes that cost you in terms of both your company’s bottom line and reputation.

In the end, I felt the negatives of taking VC funding outweighed the positives for my company, but there are certainly cases in which VCs can be useful. If you are considering raising VC funding, my best advice is to proceed cautiously. Carefully evaluate your needs and whether or not other funding sources--like angel investors or small business loans--can meet them at a lower cost. After all, venture capital interest does not equal success. Nor is funding an end in and of itself.

Published on: Aug 5, 2013

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.